Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Whether a royalty payment based on the net sales of reproduced artwork is a "royalty or similar payment on or in respect of a copyright in respect of the production or reproduction of any literary, dramatic, musical or artistic work" within the meaning of subparagraph 212(1)(d)(vi) of the Act and is therefore exempt from Part XIII withholding tax otherwise payable under paragraph 212(1)(d). Is such a royalty also exempt from withholding tax under paragraph 3(a) of Article XII of the Canada-US Income Tax Convention?
Position: Subparagraph 212(1)(d)(vi) would apply to part of the payment and Article VII of the Canada-US Income Tax Convention may apply to the part of the payment that is for an exclusive right to reproduce the artwork.
Reasons: Wording of subparagraph 212(1)(d)(vi) and Articles VII and XII of the Canada-US Tax Convention; facts on hand.
2004-008663
XXXXXXXXXX Catherine Bowen
(613) 957-8284
June 14, 2005
Dear XXXXXXXXXX:
Re: Copyright Royalties under Subparagraph 212(1)(d)(vi)
This is in response to your letter dated July 23, 2004, wherein you requested our comments on whether withholding taxes are applicable on royalties paid by a Canadian resident to residents of the United States under a licensing agreement. We apologize for the delay in responding to your letter.
The hypothetical facts are as follows:
1. Opco is a Canadian-controlled private corporation carrying on an active business in Canada.
2. Opco desires to enter into a licensing agreement with certain artists resident in the United States (or with a U.S. agent representing those artists) (the "Licensor") whereby Opco will acquire the right to reproduce specific artworks created by those artists (the "Artworks"). Opco will only be able to reproduce the Artworks in a specified medium (e.g., wall décor) (the "Licensed Product"). The Licensor will grant Opco the exclusive rights to the Artworks for the Licensed Product for the term of the license agreement in North America.
3. Opco deals at arm's length with the Licensor.
4. Opco will be required to place a copyright notice of the Licensor on each Licensed Product.
5. Opco will pay a royalty to the Licensor equal to 5% of Opco's net sales from each Licensed Product it reproduces.
You asked whether the exception in subparagraph 212(1)(d)(vi) of the Income Tax Act (the "Act") and paragraph 3(a) of Article XII of the Canada-US Income Tax Convention (1980) (the "Convention") will apply to exempt the royalty payments made by Opco to the Licensor from withholding tax.
Written confirmation of the income tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request as described in Information Circular IC 70-6R5 dated May 17, 2002 issued by the Canada Revenue Agency ("CRA"). Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. Although we cannot provide any comments with respect to the specific asset referred to in your letter, the following general comments may be of assistance.
Royalty payments for the right to reproduce copies of the copyrighted work of an artist and to distribute those copies are considered by the CRA to be royalties in respect of a copyright in respect of the production or reproduction of the work that are exempt from Part XIII tax under subparagraph 212(1)(d)(vi) of the Act. It does not matter whether the royalty is calculated based on the number of copies made, the number of copies sold or the amount of the license fees earned. Such payments would also be a royalty referred to in paragraph 3(a) of Article XII of the Convention and be exempt from withholding tax under that Convention.
However, where a license agreement also specifies that the licensor agrees not to reproduce or distribute or permit any other person to reproduce or distribute copies of the artistic work in a particular geographical area specifically assigned to the licensee, a portion of the payments derived by the licensor under the agreement would be considered in respect of such undertaking and would fall under subparagraph 212(1)(d)(iv) of the Act. Consequently, such amounts would not be exempt from Part XIII tax by virtue of subparagraph 212(1)(d)(vi) of the Act. Nor would such amounts be a royalty referred to in paragraph 3(a) of Article XII of the Convention. However, they may be exempt from withholding tax pursuant to Article VII of the Convention if they are business income to the recipient and the recipient has no permanent establishment in Canada.
Our comments are provided in accordance with the practice outlined in paragraph 22 of IC 70-6R5. We trust our comments are of assistance.
Yours truly,
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Planning Branch
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